medium · Principles of Finance capital-budgeting
A firm is considering a project with an initial investment of $1,000 and expected cash inflows of $600 in Year 1 and $600 in Year 2.
If the cost of capital is 10%, how do the Internal Rate of Return (IRR) and the Modified Internal Rate of Return (MIRR) compare?
- IRR and MIRR are both 20% because the total inflow is 1,200 on a 1,000 investment.
- IRR is approximately 13.1% and MIRR is approximately 12.2%.
- IRR is lower than MIRR because the project's return is higher than the cost of capital.
- The MIRR cannot be calculated without knowing the terminal value of the firm's assets.
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